Digital inclusion and mobile sector taxation in Honduras

Transcription

1 Digital inclusion and mobile sector taxation in Honduras MARCH 2016

2 Important Notice from Deloitte This final report (the Final Report ) has been prepared by Deloitte LLP ( Deloitte ) for the GSMA on the basis of the scope and limitations set out below. The Final Report has been prepared solely for the purpose of assessing the economic impacts of mobile sector taxation in Honduras by modelling the potential impacts that could be realised by a change in mobile taxation under a set of agreed assumptions and scenarios. No party other than GSMA is entitled to rely on the Final Report for any purpose whatsoever and Deloitte accepts no responsibility or liability or duty of care to any party other than the GSMA in respect of the Final Report or any of its contents. The scope of our work has been limited by the time, information and explanations made available to us. The information contained in the Final Report has been obtained from the GSMA and third party sources that are clearly referenced in the appropriate sections of the Final Report. Any results from the analysis contained in the Final Report are reliant on the information available at the time of writing the Final Report and should not be relied upon in subsequent periods. Accordingly, no representation or warranty, express or implied, is given and no responsibility or liability is or will be accepted by or on behalf of Deloitte or by any of its partners, employees or agents or any other person as to the accuracy, completeness or correctness of the information contained in this document or any oral information made available and any such liability is expressly disclaimed. All copyright and other proprietary rights in the Final Report are the property of the GSMA. This Final Report and its contents do not constitute financial or other professional advice, and specific advice should be sought about your specific circumstances. In particular, the Final Report does not constitute a recommendation or endorsement by Deloitte to invest or participate in, exit, or otherwise use any of the markets or companies referred to in it. To the fullest extent possible, both Deloitte and the GSMA disclaim any liability arising out of the use (or non-use) of the Final Report and its contents, including any action or decision taken as a result of such use (or non-use). Deloitte contact Davide Strusani TMT Economic Consulting, London dstrusani@deloitte.co.uk

3 CONTENTS IMPORTANT NOTICE FROM DELOITTE 2 EXECUTIVE SUMMARY 4 1 THE MOBILE SECTOR IN HONDURAS Mobile services are driving connectivity in Honduras Mobile services promote economic and social development Connectivity in Honduras: current gaps 14 2 TAXATION ON THE MOBILE SECTOR IN HONDURAS Taxes on mobile consumers in Honduras Taxes on mobile operators in Honduras Total taxation on the mobile industry Best practice in taxation policy 24 3 ECONOMIC IMPACTS OF REFORMING MOBILE TAXATION IN HONDURAS How mobile taxation in Honduras impacts the economy Scenario 1: Eliminating the fee on international incoming calls Scenario 2: Eliminating the mobile security tax Scenario 3: Eliminating the FITT contribution 31 4 MOBILE TAXATION IN HONDURAS: POTENTIAL FOR REFORM Contribution to fiscal stability Options to reform mobile taxation 34 APPENDIX A METHODOLOGY 36 3

4 Executive Summary Mobile services are driving connectivity in Honduras and delivering significant benefits for its economy Since the launch of mobile services in 1996, the mobile sector in Honduras has grown rapidly and today there are over 5.4 million users, representing 66% of the population. The mobile industry is playing a key role in delivering connectivity to Honduran households, particularly in rural and remote areas where it is difficult and more costly to develop fixed line infrastructure. Investment in mobile infrastructure in the last years has led to 3G coverage being available to 89% of the population, although only 22% of the population is currently accessing high speed mobile broadband (3G or 4G services). The use of mobile services has the potential to deliver a wide range of benefits to Honduras through promoting digital inclusion, which enables people to benefit from the exchange of information, has the potential to improve access to education, healthcare and government services, and promotes economic growth as found in studies by the World Bank. For example, mobile money services are helping to increase financial inclusion, as recognised by the sector regulator, Conatel, while SMS services are supporting farmers to receive accurate and timely information. These impacts have the potential to support the government in achieving many of its development objectives outlined in the Plan Estratégico de Gobierno (Government Strategic Plan ). Mobile and telecommunications specific taxes increase the tax burden on mobile operators and affect affordability Mobile operators in Honduras are subject to a number of telecommunications and mobile specific taxes and regulatory fees. These include: A mobile security tax introduced in 2011 as a temporary tax, charged at a rate of 1% of gross income of mobile operators. A municipal telecoms services selective tax that is levied on telecommunication services providers at a rate of 1.8% of gross income from airtime services. Recurring spectrum fees, where the rate is determined by several technical factors related to frequency and is adjusted annually in line with inflation. Concession and supervisory fees at the rate of 1.5% and 0.5% of gross income, including a contribution of 1% to the universal service fund (FITT) that was established by the central government in An annual numbering fee set at US$ 0.03 per number and an international incoming calls fee at US$ 0.03 per minute. Mobile operators paid an estimated US$ 228 million in taxes and regulatory fees to the Honduran government, which represented 23% of their market revenue in On a similar basis, the taxes and regulatory fees levied directly on mobile operators comprised 14% of market revenues. In addition to the taxes and regulatory fees discussed above, in 2013, the largest mobile operators, Tigo and Claro, paid US$ 12.1m each in an auction for 4G spectrum. Taxes and fees imposed on the mobile sector affect affordability of mobile services for consumers. High levels of income inequality and the low purchasing power of a large proportion of Honduran households 4

5 mean that affordability of mobile services is a significant barrier to broader uptake across the population of traditional mobile services and mobile broadband. For four-fifths of the population, the cost of both basic mobile services and mobile broadband exceeds the 5% of monthly income, an affordability threshold established by the Broadband Commission for Sustainable Development. By transitioning to a non-distortionary tax system, the Honduran government can promote digital inclusion, economic growth and fiscal stability The mobile-specific taxes that are levied in Honduras do not appear to fully align with many of the recognised principles of taxation outlined by organisations such as the International Monetary Fund (IMF). In particular, the IMF recommends that taxation should be broad-based and account for sector and product externalities, whilst taxes such as the mobile security tax are not broadbased and may lead to inefficiently low consumption and investment in the mobile sector, and do not account for any positive spillover effects which may be felt within the wider economy. Discussions with Honduran mobile operators have indicated that the mobile industry has a role in supporting economic development, providing government revenues and therefore contributing to public services. However, seeking to impose a greater burden of taxation on mobile, whilst potentially delivering short-term benefits to government revenues, could be to the detriment of longrun socioeconomic development. A number of scenarios have been analysed which examine the impact of changes to mobile specific taxation on mobile penetration, economic growth and tax revenues. The scenarios consider the impact of abolishing the international incoming calls fee, the abolition of the mobile security tax and the abolition of the FITT contribution. Across these scenarios, the reduction of the tax burden on mobile operators has the potential to reduce their cost of doing business, which could be passed through to consumers in the form of lower prices. The resulting expansion of the user base may lead to an increase in tax revenues through which the government could potentially achieve tax neutrality in a limited number of years in all the estimated scenarios. Tax reform could also promote further investment by mobile operators, which could further lead to greater connectivity beyond that captured in the analysis. Eliminating the international incoming call fee. Under this scenario, over the period, increased demand for mobile services has the potential to add a cumulative 159,000 connections, of which 115,000 are 3G connections. Through the direct impacts of the mobile operators and the indirect impacts generated by the activities enabled by mobile operators, increased mobile usage could lead to additional GDP growth, delivering up to an additional US$ 126 million, with an additional US$ 9 million in tax revenues in 2020 alone. Eliminating the mobile security tax. Under this scenario, increased demand for mobile services has the potential to add more than 26,800 extra connections over the period , of which 19,400 are expected to be 3G mobile broadband connections. This could support up to an additional US$ 21 million in GDP, enabling up to an additional US$ 1 million in tax revenues to be collected through more broad-based taxation in Eliminating the FITT contribution. Under this scenario, over the period, increased demand for mobile services has the potential to add a cumulative 21,000 connections, of which 15,000 are expected to be 3G mobile broadband. Increased mobile usage could lead to additional GDP growth, delivering up to an additional US$ 16.5 million in GDP with up to an additional US$ 0.8 million in tax revenues in Based on evidence from a series of studies and best practice principles in taxation, as well as consultation with GSMA and mobile operators, tax reform in the mobile sector has the potential to contribute to economic growth and government revenues beyond its current impact through: The analysis of these tax reform scenarios suggests that they have the potential to have the following impacts: 1 1. The potential effects of these reforms have been considered separately only and interaction between the policy reforms would need to be considered in order to calculate the potential cumulative effect. The introduction of all three reforms could be expected to reduce the impacts estimated. 5

6 Development of ICT usage across sectors: By reducing mobile-specific taxation, such as the international incoming calls fee, the government could support an increase in the number of mobile broadband connections, promoting digital inclusion. This has the potential to enable the widespread use of ICT across areas such as healthcare, education and the provision of government services. This has in turn the potential to create new opportunities for innovation, fostering further growth within the sector. Increased economic development: The tax reform alternatives examined have the potential to increase the usage of mobile services and uptake of mobile broadband. In the long-term this has the potential to increase GDP by US$ 420 million between 2016 and 2020 in the case of removal of the fee on international incoming calls. Improved network infrastructure: Ensuring an equitable structure of regulatory fees has the potential to increase the investment required to further improve mobile broadband network infrastructure. Further international investment could allow for economies of scale for mobile operators, supporting reduced prices for consumers in the longer term and facilitating the spread of mobile broadband. Sustainable government revenues: Achieving higher connectivity need not result in a reduction in government revenues in the medium to long-term. By increasing productivity and economic growth, an elimination of the international incoming calls fee has been estimated to lead to tax neutrality in 2018 through the expansion of the tax base. Support in the transition towards a knowledgebased economy: Reforming mobile sector taxation has the potential to encourage widespread use of mobile broadband that in turn provides greater access to information. The creation of local content can also promote higher-skilled employment and the transition to a knowledge-based economy where information drives productivity and economic growth. 6

7 1. The mobile sector in Honduras Since the launch of the first services in 1996, the Honduran mobile industry has followed a steady development path. In the last ten years, the number of unique subscribers has grown more than fivefold, totalling 5.4 million users, or 66% of the population as of Q (see Figure 1). The mobile market has three operators: Tigo and Claro, the two leading operators whose market shares are 60% and 39.2% respectively, and Hondutel, a state-owned company with 0.9% of the market. 2 This report assesses how mobile taxation impacts on digital inclusion and how addressing mobilespecific taxation could complement the government s development goals. The analysis utilises a model of the Honduran mobile sector and economy to examine a number of options for the government to transition to a tax structure where mobile is not subject to distortionary taxation, in a way that promotes economic growth and protects the government s tax revenue position in the medium term. This section describes the mobile sector in Honduras, the benefits of digital inclusion, and the current gaps and barriers to greater connectivity. Section 2 describes the taxes levied on the mobile sector in Honduras, the implications of these taxes for the mobile sector and the wider economy, and discusses the economic and regulatory environment in Honduras. It also compares the taxes levied in Honduras with international benchmarks and with best practice on taxation principles as recommended by leading international organisations. Section 3 considers effective policy alternatives for rebalancing taxes on the mobile sector. These policies can support the Honduran government s overall objectives, while increasing economic growth and productivity. Section 4 concludes, illustrating the contribution to fiscal stability of the policies discussed and presents potential steps which could be considered to align mobile taxation to standard goods and services taxation. The Appendix describes the economic model of the Honduran mobile sector and economy that has been used in the scenario analysis to estimate the impacts of rebalancing mobile sector taxes. 2. GSMA Intelligence Database, data for Q

8 1.1 Mobile services are driving connectivity in Honduras Mobile services are crucial to the delivery of connectivity to a large proportion of Honduran residents, as teledensity of fixed-line telephony, i.e. the number of telephone connections for every hundred individuals, is limited and stands at 7%. 3 Mobile penetration in Honduras 100% 80% 60% 40% 20% 0% % of total population Mobile penetration connections Mobile penetration unique subscribers 3G penetration Source: GSMA Intelligence Database. Penetration rates are calculated as the averages over four quarters. Figure 1 Investment in network upgrades has led to a high coverage of 3G services, currently available to 89% of the population. 4 However, the number of 3G connections is still a relatively low share of total connections (28%). This is lower than the Central American average of 41%. 5 A comparison with a selection of countries from Latin America and others globally with similar penetration rates 6 and similar real GDP per capita shows that the development of the mobile industry in Honduras has brought a relatively high level of connectivity. Notwithstanding its GDP per capita, the lowest in the region 7 with an average annual income per person at US$ 4,583 in purchasing power parity (PPP) adjusted values, Honduras has a penetration rate that is higher than the regional average and similar to that of several richer countries. For example, while Colombia and Peru have per capita income levels twice that of Honduras, the three countries have similar penetration rates Buddecomm, Honduras, Telecoms, mobile, broadband and digital media statistics and analyses 4. GSMA Intelligence Database, data for Q GSMA Intelligence Database, data for Q The penetration rate per unique subscriber is defined as the ratio between unique mobile subscribers and population. 7. The World Bank, World Development Indicators 2015.

9 GDP per capita 2014 (PPP US$), and mobile penetration (unique subscribers) in selected countries in Q % 25 % of total population 70% 60% 50% 40% 30% 20% 10% US$, thousands 0% 0 Chile Panama Venezuela Mexico Brazil Costa Rica Thailand Colombia Peru Ecuador Paraguay El Salvador Guatemala Morocco Guyana Bolivia Nigeria India Nicaragua Honduras Mauritania Central America South America European Union Mobile penetration, unique subscribers Q (LHS) GDP per capita 2014, PPP (current international $) (RHS) Source: GSMA Intelligence Database and World Bank World Development Indicators. Central America comprises: Belize,Costa Rica, El Salvador, Guatemala, Mexico, Nicaragua and Panama. Figure Mobile services promote economic and social development Mobile is bringing wide-ranging benefits to the Honduran society and increased mobile connectivity can play an important role in addressing Honduran socioeconomic issues and contributing to the achievement of the government s objectives. In particular: 1. Mobile services promote long-run economic growth: a number of studies have already highlighted the economic growth potential of mobile: Studies by the GSMA and the World Bank have estimated that a 1% increase in mobile penetration could lead to an increase in the GDP growth rate of 0.28% in developing countries. 8 The World Bank has found that in developing economies, such as Honduras, every 10% increase in broadband subscriber penetration 9 accelerates economic growth by 1.38%. 10 A 2012 GSMA/Deloitte/Cisco study has found that substitution from 2G to 3G connections have significant economic benefits. 11 For a given level of total mobile penetration, a 10% substitution from 2G to 3G penetration was found to increase GDP per capita growth by 0.15 percentage points. The study 8. This is based on a study of 40 economies over the period ; for full details of the methodology, see Qiang, C. Z. W., Rossotto, C.M., Economic Impacts of Broadband, in Information and Communications for Development 2009: Extending Reach and Increasing Impact, World Bank, Washington D.C., The distinction between users and subscribers of telecommunications services should be noted. Users refer to individuals who do not necessarily own or pay for telecommunications services, but who have access to such services through work, family etc. Subscribers, on the other hand, are individuals who pay for subscriptions to such services, to which a number of individuals may have access. Based on ITU, Manual for measuring ICT Access and Use by Households and Individuals. 10. Qiang, C. Z. W., Rossotto, C.M., GSMA/Deloitte/Cisco, What is the impact of mobile telephony on economic growth?. 9

10 also found that mobile broadband usage supports growth and that this impact is larger at higher levels of usage. This means that countries with relatively low usage like Honduras have considerable scope for accelerating growth through increased mobile broadband usage. Other research suggests that for every new job created in the mobile sector in countries like Honduras, another six are generated in the wider economy Mobile services promote digital inclusion and the growth of a knowledge-based economy: the concept of digital inclusion refers to the principle that everyone should benefit from ICT, with no regard to location and/or socioeconomic status. Mobile services provide a cost-effective way of achieving digital inclusion and, by facilitating the exchange of ideas and information, can support a move towards a knowledge-based economy. The World Bank has stated that the movement towards a knowledge-based economy should be the aim of all governments, as knowledge becomes increasingly crucial to preserving national competitiveness. 13 This study identifies four pillars of knowledge-based economies, one of which is information infrastructure, with technology such as mobile phones required to facilitate effective communication and the dissemination and processing of information. 3. Mobile services enhance productivity, innovation and social development: by enabling businesses and government to deliver their services faster, and at a lower cost, mobile services increase productivity across the Honduran economy. Mobile services can reduce transaction costs, making it less costly for Honduras to communicate and conduct everyday business operations, supporting the expansion of businesses and enterprises. Through wider effects on the economy, this helps to increase living standards in Honduras and improve Honduras international competitiveness. Mobile services also create opportunities for investment, innovation and employment in the mobile sector and in a variety of other jobs that form part of the mobile ecosystem, such as equipment providers, workers in the network engineering and maintenance industry, and providers of related business services. Mobile can also enable more effective delivery of public services and support social development. In particular, mobile and internet communication offers an effective means of bringing healthcare and education services to remote and under-served areas, through m-government initiatives and mobile applications. For example, a study on the impact of ICT on agriculture in Honduras has shown that the use of SMS to receive market price information can be an effective solution to the absence of timely market information, with farmers reporting an increase of 12.5% for received prices High levels of digital inclusion can stimulate the adoption of innovative solutions to a wide range of socioeconomic issues: Extending financial inclusion through mobile. Through mobile money (m-money), mobile contributes to greater financial inclusion, and as such is a powerful tool for economic and social development, increasing the financial security of people and improving their access to basic financial services. In addition to this, a large part of the population is currently financially excluded. Data from the World Bank s Global Financial Inclusion Database shows that in 2014 only 31.5% of the adult population in Honduras had a bank account. Further, 45.9% of the Honduran population live in rural areas that lack the necessary banking infrastructure. As such, Honduras presents an opportunity for the development of m-money. A report by the sector regulator Conatel recognises the importance of mobile money in Honduras as a tool for economic growth through greater financial inclusion, in particular through the provision of financial services to the rural population. 15 Mobile banking and m-money services were launched by Tigo in January 2011 and have reportedly reached one million users in February Moreover, in March 2014 Tigo launched a life insurance product with a local partner. This product 12. Based on a number of studies conducted in developing and developed countries; see, for example, Moretti, 2010, O2 for ONS, 2002, Ovum, 2010; Zain, Ericsson, 2009, Kaliba et al, World Bank, The four pillars of a knowledge-based economy, Allan, P., Agüero, M., Espinoza. S., The Impact of ICT on Vegetable Farmers in Honduras. Working Paper 243, Inter-American Development Bank. 15. Conatel, Estudio de Banca Movil y Dinero Movil, en Honduras. 16. Buddecomm, Honduras, Telecoms, mobile, broadband and digital media statistics and analyses. 10

11 sold 150,000 policies in the first six months. 17 The potential impact on the welfare of Honduran residents is amplified by the fact that the access to financial services, especially microfinance services, appears to be an essential tool in coping with extreme poverty. 18 Improving healthcare through mobile. Access to the internet generates different opportunities for healthcare improvements, through better information of patient and health workers, higher prevention through increased health literacy, the adoption of new technologies for diagnosis and services to support management of treatments. 19 The World Economic Forum suggests that the interaction between mobile finance and the health sector creates additional potential benefits in terms of improved transparency in transactions and through several incentive mechanisms as conditional transfers of vouchers or cash, mobile health micro-insurance and more efficient supply chain settlement and credit. 20 Mobile services can help reduce poverty. The incorporation of mobile in production and trade activities can stimulate the growth of supply and customers network. Different case studies in Latin America have shown that, by strengthening social and economic networks, mobile services can benefit even rural production and commercial activities. 21 There is increasing evidence therefore that mobile communication can play an important role in the fight against poverty. As with many other developing economies, Honduras faces several socioeconomic challenges. In 2014, 68.2% of the population was living in poverty while 44.6% of the population lived in extreme poverty. 22 Honduras also faces a significant rural-urban income gap: 57.5% of the rural population compared to 33.2% of the urban population lives in extreme poverty. 23 and gender equality, improve well-being of people of all ages and promote sustainable development. The Global Goals include 17 goals that were finalised and agreed upon in September The Global Goals build on the UN Millennium Development Goals (MDGs) that expired at the end of The Honduran government s strategy to address its socioeconomic challenges is outlined in three separate plans that establish the strategic objectives through to 2020: The Plan Estratégico de Gobierno (Government Strategic Plan ) aims to reduce the level of poverty in the country, improving the competitiveness of the Honduran economy, increase employment and enhance both health and education systems. 25 The Plan Nacional de Salud (National Health Plan ) sets out the government s plan to extend the coverage of health services to the majority of the Honduran population. The two central pillars of the plan are the provision of assistance to the most vulnerable sectors of the population and the prioritisation of the treatment of the diseases that have higher impact on the population. 26 The Estrategia Nacional de Inclusión Financiera (ENIF) (National Strategy for Financial Inclusion ) is a five year plan aimed at extending the provision of financial services to 98 municipalities with very low population density and low or no access to financial institutions. 27 Mobile has the potential to support in a number of these objectives as set out in Figure 3. Overall, the mobile industry has the potential to play a critical role in the achievement of the UN Global Goals. The Global Goals set out to end poverty and hunger, ensure inclusive and equitable economic growth and quality education, achieve economic 17. GSMA, State of the Industry, Mobile Financial Services for the Unbanked. 18. Collins. C, Morduch, J., Rutherford, S., Ruthven, O., Portfolios of the poor, how the World s poor live on a 2$ a day, Princeton, Princeton University Press. 19. Deloitte, Value of Connectivity, Economic and Social Benefits of Expanding Internet Access. 20. World Economic Forum, Amplifying the Impact: examining the intersection of mobile health and mobile finance. 21. Castells, M., Galperin, H., Fernández-Ardèvol, M., Comunicación móvil y desarrollo económico y social en América Latina. Madrid, Fundacion Telefonica. 22. Instituto Nacional de Estadística (INE), Encuesta Permanente de Hogares de Propósitos Múltiples, Instituto Nacional de Estadística (INE), Encuesta Permanente de Hogares de Propósitos Múltiples, For the Global Goals, see: Gobierno de la Republica de Honduras, Gobierno de la Republica de Honduras, Gobierno de la Republica de Honduras, 11

12 The role of mobile in driving economic growth in Honduras Government policies Plan Estratégico de Gobierno (Government Strategic Plan ) Plan Nacional de Salud (National Health Plan ) Estrategia Nacional de Inclusión Financiera (ENIF) (National Strategy for Financial Inclusion ) Summary of policies Improvement of economic productivity; Higher employment; Enhancement of social protection and reduction of extreme poverty; Higher access to and quality of education; Development of the growth potential of micro, small and medium enterprises (MSME) and of their impact on the economy. Higher equitable access of the population to the benefits of healthcare; Enhancement of the efficient and efficacy of public healthcare, improving costeffectiveness and quality of services. Extension of the provision of financial services to 98 municipalities with very low population density and low or absent access to financial institutions; Grant of long-term and low interest rate loans to the informal economy, micro and small businesses, entrepreneurs and farmers. MOBILE CAN SUPPORT THESE OBJECTIVES Benefits of mobile services Promote digitalisation and the growth of knowledge-based economy Enhance productivity, innovation, and social development Promote long-run economic growth Promote economic growth and enhance productivity and social cohesion The development of e-government Support e-health Education How mobile can help By providing access to learning resources and fostering information sharing, mobile access can promote primary and secondary education and increase literacy rates. By supporting a large ecosystem of industries and small businesses, mobile services improve labour and capital productivity, thus contributing to increase economic growth, decrease poverty and foster investment. Increased broadband access promotes job creation, economic growth and innovation. Mobile services and m-government initiatives contribute to administration efficiency at local and national government levels, improving ease of doing business and making FDI more attractive. Increased access to information promotes better health education and health outcomes. Source: Honduran Government website and Deloitte analysis. Figure 3 12

13 1.3 Connectivity in Honduras: current gaps The relatively high levels of mobile market penetration in Honduras suggest that the mobile industry is already making an important contribution to the socioeconomic development of the country. However, gaps in access to and availability of mobile services, including mobile internet, remain and there is potential to gain greater benefits through digital inclusion. Affordability of mobile services and devices is an issue for those at the bottom of the pyramid, i.e. the poorest households within the country. Honduras is characterized by a high level of income inequality, the highest in the Latin America and Caribbean region, with the poorest 40% of the population holding just 10.3% of total income. 28 The high level of inequality has considerable repercussions on the affordability of mobile services for a large part of the population. For the poorest three quintiles, which corresponds to 60% of the total population, accessing the internet through mobile is unaffordable, given that the cost of mobile broadband amounts to 48%, 21% and 12% respectively of their annual income. Affordability of mobile services by income group, % 70 Prices as a proportion of GNI per capita (%) 50% 40% 30% 20% 10% US$, thousands 0% 1st 2nd 3rd 4th 5th Household income quintile group 0 Annual GNI per capita (US$) (RHS) Mobile voice and SMS (% of household inclome) (LHS) Mobile broadband, prepaid 1024 MB cost (% of household income) (LHS) 5% affordability treshold Source: Deloitte analysis based on data from GSMA Intelligence Database and ITU (Measuring the Information Society Report 2014). Note: Mobile services refer to a low-user basket of mobile calls and SMS. Data refer to 2013 as more recent prices were not available at the time of writing this report. The analysis takes into consideration only prepaid mobile broadband services because in the first three quarters of 2015 the vast majority (93%) of total connections were associated with prepaid services (GSMA Intelligence Database). Data on mobile broadband cost refer to a prepaid 1024 MB service as prices for 500 MB services are not reported by ITU. Figure The World Bank, World Development Indicators

14 A definition of affordability with respect to mobile broadband services is given by the Broadband Commission for Sustainable Development, an organisation created by the International Telecommunication Union (ITU) and the UN to boost the importance of broadband on the international policy agenda. In the Broadband Targets for 2015, the Broadband Commission sets a target for affordability of entry-level broadband services amounting to less than 5% of average monthly income. By this indication, only the richest 20% of the Honduran population can afford mobile broadband. Only a quarter of the population is accessing mobile internet with 3G-4G technologies. Mobile internet penetration is 34% and 3G-4G penetration is 22%. 29 This is lower than the Central American averages of 40% and 31% respectively, showing that there is still scope for improvement. Mobile internet penetration in selected countries and regions, unique subscribers (% of population), Q % 50% Market Penetration, unique subscribers, mobile internet Market Penetration, unique subscribers, mobile internet 3G-4G 40% 30% 20% 10% 0% European Union Costa Rica South America Panama Mexico Nicaragua Central America El Salvador Honduras Belize Guatemala Source: GSMA Intelligence Database Figure 5 Less than a third of the population is using a smartphone. Only 28% of the Honduran population have access to a smartphone. 30 While feature phones allow consumers to access regular mobile services and a limited number of online services, smartphones allow users to fully take advantage of all the possible uses of mobile broadband. A higher adoption of smartphones would therefore be an essential step in broadening digital inclusion in Honduras. In addition to the low usage of mobile broadband, data on the minutes of use per connection per month suggests that the low purchasing power of Honduran consumers might be reflected in a distorted demand for mobile services. Despite the relatively high level of mobile penetration, the intensity of usage of mobile services in Honduras appear to be lower than other countries in the region, such as Colombia, Mexico, Chile and Peru. 29. GSMA Intelligence Database, data for Q GSMA Intelligence Database, data for Q

15 Minutes of use per connection per month Colombia Mexico Chile Peru Honduras Brazil Ecuador Source: GSMA Intelligence Database, 2014 data. Note: The average for Colombia is calculated on 2013 data. The statistic for Honduras is calculated on operators' data. Figure 6 Additional potential barriers to digital inclusion are lack of local content and digital illiteracy. The uptake of mobile broadband could also be partially affected by the absence of relevant content for Honduran users and the level of digital illiteracy. 15

16 Only the richest 20% of the Honduran population can afford mobile broadband 16

17 2. Taxation on the mobile sector in Honduras The Honduran mobile sector is subject to a number of taxes levied on both operators and consumers. The extent to which these charges ultimately fall on operators or consumers depends on the type of tax and market conditions. Some taxes and fees may be absorbed by operators in the form of lower profits, whilst others may be passed through to consumers through higher prices, or there may be a combination of the two. This section reviews the taxes applied to mobile consumers and operators in Honduras, focusing on those that are mobile-specific, i.e. those which do not apply to other goods and services in the economy. It also compares the mobile taxation system with similar countries. 2.1 Taxes on mobile consumers in Honduras Consumer taxes in Honduras apply to the sales of devices, usage of services, SIM cards and mobile broadband. The 15% standard rate of the value-added tax, called the Impuesto Sobre Ventas (ISV), is applied to all the mobile services. Consumer taxes on mobile services in Honduras Tax base Tax type Tax rate Calls, SMS and data ISV 15% SIM cards ISV 15% Handsets ISV 15% Source: Mobile operator data. Figure 7 17

18 2.2 Taxes on mobile operators in Honduras Mobile operators in Honduras are subject to general taxes, such as corporation tax on profits, as with any other business. However, they also face a number of specific taxes which are mobile specific, i.e. not levied upon firms in other sectors of the economy. In addition, the mobile operators pay regulatory fees of a recurring and nonrecurring nature. Taken together these mobile specific taxes and regulatory fees add to the cost of doing business and potentially increase consumer prices and / or reduce incentives for investment. The following figure sets out the key taxes and regulatory fees faced by mobile operators. Key taxes and fees levied on mobile operators in Honduras Payment base Tax type Tax rate Profits Corporation tax 25% (alternatively 1.5% of net fixed assets) Production, sales or income Municipal business license tax 0.15% - 0.4% (progressive) Net income Solidarity contribution 5% Taxes Imported network equipment ISV Customs duty 15% 5% - 20% Mobile security tax 1% Gross income Municipal telecoms services selective tax 1.8% (previously 1.5% of gross income from airtime) Contribution to the FITT 1% Gross income Operator concession fee 1.5% Regulatory fees Numbers assigned Minutes of incoming calls Flat fees Supervisory fee 0.5% Annual numbering fee International incoming calls fee Spectrum fee One-time licence fee US$ 0.03 / number US$ 0.03 / minute Based on a number of factors relating to the frequency and adjusted annually in line with CPI Varies One-time spectrum fee Varies Mobile specific tax Telecommunications-specific tax Source: Mobile operator data. Figure 8 18

19 General taxation on mobile operators General taxation that applies to mobile operators as well as on other industries includes the following taxes: The corporation tax in Honduras is computed based on the highest of three different measures: 25% of the company s profits, 1% of net assets and 1.5% of gross incomes. In addition, when the 25% of the company s profits is payable, a solidarity contribution surtax on the net taxable income is also applied at a rate of 5%. 31 A business licence tax is collected annually by Honduran municipalities. This tax is computed at a progressive rate varying between 0.15% and 0.4% of production, sales or income. Mobile operators also pay the standard ISV rate of 15% on imported network equipment, as well as customs duties varying between 5% and 20%. Mobile-specific taxes on operators Mobile operators are subject to two additional telecommunications and mobile-specific taxes. The mobile security tax was introduced in 2011 as a temporary tax, in the framework of the wider Population Security Act (Ley de Seguridad Poblacional 32 ), which established a set of exceptional taxes. This tax is charged at a rate of 1% of gross income of mobile operators. The municipal telecoms services selective tax is a municipal tax that is levied on telecommunication services providers at a rate of 1.8% of gross income from airtime services, with municipalities receiving a value of not less than 100,000 Lempiras (HNL) per tower. Given the floor level of this taxation, it raises the possibility that mobile operators might have to make additional payments if the 1.8% rate does not cover the entire amount. Regulatory fees In addition to these general taxes on income and network equipment, mobile operators are subject to regulatory fees that are sector-specific. Mobile operators across the world purchase the different rights for their operation through licenses and fees, but the levels of these costs vary significantly. This section sets out the recurring and non-recurring regulatory fees faced by mobile operators in Honduras. Mobile operators are subject to recurring spectrum fees, where the rate is determined by several technical factors related to the spectrum frequency band and is adjusted annually in line with inflation. Three additional fees are levied on mobile operators as a proportion of revenues. The operator concession fee and the supervisory fee are charged at the rate of 1.5% and 0.5% of gross income. The third fee is a contribution of 1% to the FITT (Fondo de Inversiones en Telecomunicaciones y las Tecnologías de la Información y las Comunicaciones 33 ), a universal service fund (USF) that was established by the central government in The main objective of the fund is to provide financial resources for the establishment of universal service and ensure access to ICT and basic telephony in Honduras. However, discussions with mobile operators suggest that this may have not been put to use so far. It is generally accepted that taxes and regulatory fees levied on revenues, instead of profits, can be inefficient. These taxes discourage investments as taxes applied on gross revenues directly reduce the profitability of all operators, independently of their level of profitability. In a given year, these taxes have the same effect on operators with positive profits and operators with no profits due to recent network investment. These taxes are not transparent. Unlike standard sales taxes, which are collected from consumers on behalf of the government, taxes imposed directly on operators revenues imply that mobile operators must either suffer a consistent reduction in their profitability or pass these taxes through to consumers in a nontransparent way, as they cannot itemise the tax in prices or receipts. Further, imposing taxation on firms 31. Information provided by operators. 32. Congreso Nacional de Honduras, Ley de Seguridad Poblacional, The fund was established with the Decreto Legislativo número

20 revenues produces lower market volumes and higher prices than a revenue equivalent tax on profits. Finally, mobile operators are also subject to an international incoming calls fee levied at US$ 0.03 per minute of calls. Previous Deloitte analysis of similar taxes charged in a number of African countries 34 has found that a tax of this type may create a number of unintended negative consequences for local operators, consumers and business in the country in which it is applied. For example, the study noted that following the application of surtaxes on international inbound call termination in Congo Brazzaville, prices of inbound traffic rose by as much as 111% and data from an operator indicated that inbound traffic fell by 36% in two years following the tax. In Honduras, the international incoming calls fee may induce higher prices, reduce incoming calls volumes and negatively impact the economy by increasing the costs for local businesses. Mobile operators also pay an annual numbering fee set at US$ 0.03 per number. The following figure sets out the other various taxes and fees that are imposed on an operator. The number of taxes and fees adds to compliance costs and administrative burden, beyond the actual tax payments. 34. Deloitte and GSMA, Mobile taxation: Surtaxes on international incoming traffic. 20

21 Other taxes and fees payable by mobile operators Tax type Payment base Tax rate IHSS Salary cap (HNL 7,000) 7.2% RAP Total amount of monthly salaries and commissions 1.5% Infop Total value of the accrued wages 1.0% Tax on net assets (Impuesto al activo neto) Net assets of the company minus HNL 3,000, % General taxes Telecommunications fees and taxes Enee Consumption (KW) HNL 5.20 per KW Property tax (Bienes inmuebles) Value of real estate assets of the company Based on tax plan Labelling tax (Rótulos) Labels inventory Charging per square meter, based on the excise plan Environmental tax (Tasas Ambientales Serna) Fixed fee per site HNL 50, Municipal Environmental tax (Tasas Ambientales Municipales) Withholding income tax on software (Retención ISR a software) Set by the Arbitration Plan Value of the software 10.0% Varying rate Poles rental (Alquiler de Postería) Number of poles USD 0.85 per pole Internet regulation special contribution (Aporte en Especies Reglamento Internet) Licence exploitation fee (Tasa por explotación de la Licencia) Retention for International Programming Services (Retención por Programación o Servicios Internacionales) Concession fee (Derecho de Concesión) Varying according to number of clients 5.0% Gross income (it applies to dealers only) 1.5% Payments made to international programmers or operators Varying payment, made at the beginning of the grant or renewal, following a tender Special Contribution (Contribución en Especie) Absolute payment Signal blocking in jails (Bloqueo de Señales en Cárceles) Absolute payment Variable Technical equipment for Conatel Absolute payment 10.0% Conatel employees training Absolute payment Withholding for National Professional Fees, commissions, allowances, bonuses, bonuses and remuneration for technical services Fee payments made with no prepayments 12.5% Dividend Withholding Value of dividends 10.0% Withholding taxes Income tax withholding for local suppliers Turnover of local suppliers who are not subject to prepayments VAT withholding Monthly payment in accordance with the Acuerdo DEI % VAT Raffles and sweepstakes 5.0% VAT Value of service provided 15.0% Local withholding tax (Retención Impuesto Vecinal (AMDC)) Income tax withholding for employees (ISR Retención a Empleados) Wages earned by employees in the specific year Gross wages earned by each employee Impuesto sobre ganancias de Capital Net income from asset sales 10% 1.0% Varying according to tax plan Withholding for brand use payment Amount paid to the foreign supplier (brand owner) 25% Withholding for telecommunications services Amount payable to foreign suppliers 10% Withholding for cable TV rights Amount payable to foreign suppliers 25% Withholding on interests Amount payable to foreign institutions 10% Source: Mobile operator data Figure 9 21

22 2.3 Total taxation on the mobile industry Direct consumer tax payments comprise the largest share of tax and fee payments in the mobile industry, followed by corporation tax. This is followed by the international incoming calls fee payments and spectrum fee payments. Figure 10 presents the main components of the industry tax and fee payments. Composition of total tax and fee payments for the mobile industry 9% 6% 24% Corporation tax ISV 13% FITT (Telecom and ICT Investment fund) Other regulatory fees 2% 1% 7% 38% Mobile security tax Other taxes International incoming calls fee Spectrum fees Source: Deloitte analysis based on mobile operator data Figure 10 As a result of these taxes and fees, mobile operators paid an estimated US$ 228 million in taxes and fees to the Honduran government: this represented 23% of market revenue. Taxes and fees levied directly on mobile operators comprised 14% of market revenues. Operator tax and fee payments as a share of market revenues in Latin American countries where similar data is available 25% 20% 15% 10% 5% 0% Argentina Colombia Brazil Honduras Ecuador Jamaica Uruguay % of market revenues Peru Dominican Republic Guatemala Mexico 22 Source: Deloitte analysis based on mobile operator data and Deloitte and GSMA, Digital Inclusion and affordability, forthcoming Figure 11

23 In addition, mobile operators also pay non-recurring spectrum fees, which add to the tax and fee payments made by the sector. In 2013, Tigo and Claro were awarded spectrum for the provision of 4G services at US$ 12.06m and US$ 12.05m respectively. 35 The application of telecommunication-specific taxes on gross income such as the contribution to the FITT and the mobile security tax has the potential to create a number of negative economic consequences. As a result of such taxes being raised on revenues, mobile operators currently face a choice of either suffering a reduction in the profitability of their business or passing these taxes through to consumers. The risk of higher retail prices for consumers is increased by the application of additional mobile and telecommunications-specific taxes as the international incoming calls fee, the municipal telecoms selective tax and annual numbering fee. 2.4 Best practice in taxation policy An effective tax policy has to balance a number of potentially competing factors. These include the government s revenue needs, supporting key sectors and the practicalities of enforcement and collection, as well as the desire to minimise any negative distortionary impact on the wider economy. Consequently tax policy frequently must strike a balance between the theoretically correct response and one that recognises the practicalities of taxation in a market. 36 There are a number of principles that are generally recognised as contributing to an effective tax system, as outlined by international organisations such as the IMF and the ITU. 37 These principles are intended to minimise the inefficiencies associated with taxation and regulatory fees, and the distortive impacts that they may have on the wider economy. If applied in Honduras, these principles have the potential to promote mobile penetration, especially mobile internet penetration, and expand investment in the mobile sector, promoting economic growth and increased tax revenues for the government. Alignment of taxes and regulatory fees in the mobile sector in Honduras with the principles of taxation Tax Broad-based Accounts for externalities Transparent and enforceable Incentives for competition and investment Equitable (not regressive) Corporation tax Municipal business licence tax ISV Customs duty Mobile security tax Municipal telecoms services selective tax Contribution to the FITT Operator concession fee Supervisory fee Annual numbering fee International incoming calls fee Spectrum fee Source: Deloitte analysis. Table BNamericas, 2013, Honduras awards 4G spectrum to established players, available at < 36. IMF, Tax policy for developing countries, See IMF, Tax policy for developing countries, And ITU, ICT regulation toolkit, And ITU, ICT Regulation Toolkit, 23

24 As shown in the table above, many of the taxes levied on the mobile sector in Honduras do not appear to fully align with key principles of efficient taxation, which has ramifications for the development of the sector and the wider economy. In particular, those taxes that are mobile-specific have a considerable negative impact and lack of alignment with the established principles of taxation: Mobile-specific taxes and fees fail to account for positive externalities and discourage consumption: In addition to the general taxes as the corporation tax, the municipal business licence tax and the ISV, mobile is subject to a number of sector-specific taxes and fees such as the mobile security tax, the contribution to the FITT and the international incoming call fee. If passed through to consumers, these taxes can reduce the consumption of mobile services. This risk is particularly high in the case of Honduras because of the limited purchasing power of the majority of the population. By limiting the consumption of mobile services, mobile-specific taxes can have a negative impact on the wider economy. The mobile sector has positive impacts on the economic system through positive spillover effects and facilitation of innovation and productivity in other sectors such as agriculture, healthcare and education. Operator taxes could distort operators investment decisions: Mobile operator-specific taxes represent a significant part of operators tax and fee payments and are a key determinant of investment in the sector. Excessive spectrum payments and other regulatory fees, such as the contribution to the FITT and the mobile security tax, could negatively affect the roll-out of network infrastructure, 38 through reduced incentives to invest due to lower returns on the capital employed, increased uncertainty on future tax liability, distortions across industries and within ICT sector due to higher costs for mobile operators that further drive (local and foreign) investment away from mobile. Fees that are subject to frequent changes increase uncertainty and discourage investment both domestically and internationally: When a licence or spectrum band is awarded, the final price paid reflects operators expectations on future cash flows, including tax disbursements, at the time the investment decision is made. If new taxes are introduced or increased after the auction or during licence period, this negatively impacts the operators business case and can have adverse effects on consumers if some operators were to hold off investment due to taxation uncertainty. Against this background, the increase in the municipal telecoms service selective tax in from 1.5% to 1.8% of gross income from airtime may negatively affect the expected value of the mobile operators investments and could lead to lower investments in the future. The potential inefficiencies created by these various mobile taxation issues may not only limit the development of the mobile sector, but may also hinder economic growth and the realisation of the positive externalities created by mobile services. In the medium term, the Honduran government has the potential to generate more tax revenue by complementing the wider economic reforms that are currently being implemented with a transition towards a more equitable and balanced taxation structure that supports further development of mobile broadband. 38. Gorecki, Hennessy, Lyons, How impact fees and local planning regulation can influence deployment of telecoms infrastructure,

25 Mobile operators paid an estimated US$ 228 million in taxes and fees to the Honduran government: this represented 23% of market revenues. 25